When Consumer Sentiment Declines in a Consumer-Based Economy

Your editor’s father passed through town last weekend to share a few moments with his son, and to take a shift at the front door dispensing Halloween candy to trick-or-treaters.

During the course of the visit, your editor’s father also dispensed an amusing array of anecdotes and old jokes. One of those old jokes described the difference between an optimist and a pessimist:

“A team of psychologists placed two little boys in two separate rooms. They placed the first boy in a room full of brand new toys and the second boy in a room full of horse manure. The first boy refused to play with all the toys. Instead, he pouted and whined about being stuck in a room by himself.

“‘Ah yes, he is certainly a pessimist,’ the psychologists remarked. ‘Let’s check on the optimist.’ So they strolled across the hall to the room with the second boy and the horse manure. The boy had a big smile on his face and was furiously shoveling aside the manure.

“‘What are you doing?’ the bewildered psychologists asked. The boy replied, ‘There’s gotta be a pony in here somewhere!’”

US investors are exhibiting a similar optimism – the kind that borders on self-delusion.

The Dow Jones Industrial Average is levitating near two-year highs and threatening to move higher. The robust stock market action is justified, say the optimists, because the economy is improving. Curiously, the improving economy never seems to produce much economic improvement.

Last Friday, for example, we learned that US GDP increased 2% in the third quarter. Digging deeper inside this number, we learned that consumer spending contributed fully 90% of the total. Something is wrong with this picture. For starters, consumer spending cannot sustain economic growth. At some point, someone has to build something.

Additionally, even if consumers could sustain the economy all by themselves, they are of no mind to do so. Austerity and caution are still the attitudes of the moment. On the very same day that the Commerce Department credited US consumers for boosting GDP growth, the University of Michigan reported that consumer sentiment fell to 67.7 in October from 68.2 in September – its weakest reading in nearly a year.

So here’s our question: If the economy relies on consumer spending, and consumers are losing their appetite to spend, what happens to the economic recovery?

The optimists hope and believe that the economy will begin firing on more than one cylinder. They continue looking for a pony. The rest of us are simply trying to maintain a safe distance from the manure that passes for “recovery.”

Your editor is not a pessimist, but the facts are the facts. Jobs are still very hard to find, houses are still very tough to sell and the federal government is still very dedicated to “stimulating” the economy by borrowing money and/or printing dollars.

As long as these conditions persist, there will be no real recovery.

Recovery can only begin when the game-playing and the debt-financed governmental meddling end.

Eric Fry
for The Daily Reckoning